Predicting high-frequency returns using order book data

Konstantinos Vafeidis, Associate (London)

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The race to zero latency has seen vast technology investments from high-frequency traders, but few firms are willing to reveal their secrets. In this literature review, we summarise a paper that uses machine learning and order book data to show how ultra-low latency strategies produce returns.

  • The authors use the Nasdaq TotalView ITCH order book to conduct their experiments.
  • Predictability in price formation dynamics is strong up to 50-300 order book updates ahead, or up to nearly half a second ahead.
  • Predictability is easier to identify in high-frequency trading strategies than in low-frequency strategies, although it is easier to trade once discovered in the latter. This is because of technological limitations in high-frequency market structure.

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